The inflation report last week rattled the Fed a bit, responding that they don’t need to be in a hurry to cut interest rates. This forced markets to re-asses the path of rate cuts, though it is still likely that we see a cut at the December meeting. All of which pushed markets a little lower last week.
This week is a light data week. I expect investors will be processing the data — from earnings, the election, and the Fed — and updating their positioning accordingly. I will reiterate that I see some fragility in markets: valuations are stretched, which means that a small change in expectations can lead to a large change in price. Not to mention, there are still some problems lurking under the surface, like commercial real estate.
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Overall, I am reinforcing my cautious outlook. The underlying economic data is mixed, though trending negative, and companies have not been able to grow their earnings in a way that has kept up with price. I would like to see unemployment improve, earnings improve, and economic activity pick up steam. Until then, I am on a recession watch.
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Chart of the Week
With earnings season almost complete, it is worth noting that price growth has far outstripped earnings growth over the past year. It is not unusual for that to happen but we typically see a correction to the trend, with either earnings growing faster or price coming down. My reading of the economy says that it is likely to be price coming down.
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